Company Lessons in Reaching the World?s Poorest

Tuesday, March 18, 2008

Christian Seelos, director of the platform for strategy and and sustainability at IESE business school, is winner of an essay competition sponsored by the Financial Times and the International Finance Corporation on the private sector’s role in development. This is his essay:

Abstract

Recent research on business models that target the ?Bottom of the Pyramid’ (BOP), the vast untapped potential market made up of the world’s poorest people, has emphasized the need for multinationals to radically change their approach and to fundamentally rethink every step in their supply chains. Companies are advised to build new resources and capabilities, to implement multiple strategies concomitantly, and to partner with multiple constituencies that often have different strategic objectives. The complexities and potential costs involved in these recommendations, we believe, constitute severe hurdles to executive decision making and to realising the financial returns that would justify such investments.

This paper develops a strategic perspective based on observation and analysis of two successful, alternative BOP models. Our strategic framework is complementary to current recommendations and scales down many of the implementation hurdles. The cases demonstrate how companies can leverage their existing corporate capabilities to provide scale to proven and already existing organizations at the BOP, and we illustrate how this approach can provide a platform for building the commercial enterprise that creates necessary financial returns. Our analysis is grounded in and reflects important insights from business strategy research, in particular the resource based view (RBV) and recent work on strategic alliances. The unique context of these business models characterized by deep and widespread poverty expands our understanding of how strategic factors can be configured to create value.

Christian Seelos, director of the platform for strategy and and sustainability at IESE business school, is winner of an essay competition sponsored by the Financial Times and the International Finance Corporation on the private sector’s role in development. This is his essay:

Abstract

Recent research on business models that target the ?Bottom of the Pyramid? (BOP), the vast untapped potential market made up of the world?s poorest people, has emphasized the need for multinationals to radically change their approach and to fundamentally rethink every step in their supply chains. Companies are advised to build new resources and capabilities, to implement multiple strategies concomitantly, and to partner with multiple constituencies that often have different strategic objectives. The complexities and potential costs involved in these recommendations, we believe, constitute severe hurdles to executive decision making and to realising the financial returns that would justify such investments.

This paper develops a strategic perspective based on observation and analysis of two successful, alternative BOP models. Our strategic framework is complementary to current recommendations and scales down many of the implementation hurdles. The cases demonstrate how companies can leverage their existing corporate capabilities to provide scale to proven and already existing organizations at the BOP, and we illustrate how this approach can provide a platform for building the commercial enterprise that creates necessary financial returns. Our analysis is grounded in and reflects important insights from business strategy research, in particular the resource based view (RBV) and recent work on strategic alliances. The unique context of these business models characterized by deep and widespread poverty expands our understanding of how strategic factors can be configured to create value.

Introduction

Poverty

Recent research on business models that target the ?Bottom of the Pyramid’ (BOP), the vast untapped potential market made up of the world’s poorest people, has emphasized the need for multinationals to radically change their approach and to fundamentally rethink every step in their supply chains. Companies are advised to build new resources and capabilities, to implement multiple strategies concomitantly, and to partner with multiple constituencies that often have different strategic objectives. The complexities and potential costs involved in these recommendations, we believe, constitute severe hurdles to executive decision making and to realizing the financial returns that would justify such investments.

This paper develops a strategic perspective based on observation and analysis of two successful, alternative BOP models. Our strategic framework is complementary to current recommendations and scales down many of the implementation hurdles. The cases demonstrate how companies can leverage their existing corporate capabilities to provide scale to proven and already existing organizations at the BOP and we illustrate how this approach can provide a platform for building the commercial enterprise that creates necessary financial returns. Our analysis is grounded in and reflects important insights from business strategy research, in particular the resource based view (RBV) and recent work on strategic alliances. The unique context of these business models characterized by deep and widespread poverty expands our understanding of how strategic factors can be configured to create value.

Market entry at the BOP presents both opportunities and challenges

In 2002 C.K. Prahalad and Stuart Hart proposed that Multi-National Companies (MNCs) should envision market entry at the very bottom of the income pyramid. In a seminal paper they redefined the target group at the BOP in terms of incomes of less than $1,500 per year (Prahalad & Hart, 2002). MNCs were thought to be best positioned to face the particular challenges of selling to the poor and at the same time fighting poverty, because these multi-nationals could draw from a global resource base and from superior technology to address local customer needs and to develop those markets, thus stimulating economic development in poor countries.

By viewing the poor as customers and not merely as recipients of donations, the large body of BOP literature has, since that time, importantly contributed to shifting restrictive paradigms about poverty. However, while the first articles and studies on the BOP presented strong arguments for whether and why MNCs should enter low income markets, they remained relatively silent on how to enter these markets. Subsequent studies have emphasized the need to develop new capabilities and new business models, as well as the importance of partnerships (Hart & Sharma, 2004; London & Hart, 2004; Prahalad, 2004). An important implication of this work is that successful models must be developed anew for all BOP markets, thus limiting the ability to leverage existing models. Existing research does not provide insights into how all these ingredients, capabilities, resources and partners should be managed and assembled within a given context, in order to create value. Furthermore, ?selling to the poor’ does not eliminate the income constraint as a major hurdle to social and economic development and to the creation of more mature markets.

A strategic perspective on resources and markets in low-income countries

The Resource Based View (RBV) is considered to be the dominant strategy perspective explaining firm-level financial performance. According to the RBV, firms achieve above average performance: 1) through the acquisition of resources at a cost below their potential to create financial returns; and 2) by deploying and configuring these resources into capabilities that create higher than average benefits for customers, and also allow owners to capture part of that value (Sirmon, Hitt & Ireland, 2007). However, most such strategy research reflects the competitive environment of existing and mature markets. In countries with large-scale poverty, the environment is very different. Resources from capital markets, product markets and labor markets are scarce and tend to be concentrated in the hands of a few large organizations. Often institutions supporting market exchange, such as property rights or specialist intermediaries, are weak or absent. As a result, the natural arenas – i.e. ?markets’ — in which entrepreneurs and companies compete to best serve people’s needs, are generally poorly developed.

Resource scarcity at the BOP makes it difficult if not impossible to acquire relevant and valuable resources. Many important strategic resources may not be available or tradable in markets. Even if they are accessible, the value of such resources for use in new ways and unusual contexts is not known ex-ante, and can only be accurately assessed where they are currently being utilized (Denrell, Fang & Winter, 2003). Developing new resources and capabilities, as has been suggested by BOP research, is challenged by time compression diseconomies, which push the point of expected value creation further into the future. Non-traditional and uncertain environments increase the difficulties in understanding cause/effect relationships and in recognizing appropriate capability configurations, as well as in predicting their value-creation potential in new uses (Sirmon et al., 2007). This highlights the significant risk of getting it wrong when building business models based on new capability configurations at the BOP and challenges the legitimacy of ?experimentation’ in such resource constrained environments.

Companies from developed economies that enter emerging markets can exploit the skills developed in their home markets by replicating or redeploying these capabilities. These are both vital strategies in putting mature capabilities to new uses: replication leverages core capabilities to deliver products or services in new geographies; and redeployment transfers a capability to a new market for a related product or service that does not necessarily involve a new geographic location. Strategic moves involving replication and redeployment may thus be valuable in overcoming the constraints of local resource scarcity as well as the uncertainty about the value of fundamentally new capability configurations at the BOP.

Recent BOP research (London & Hart, 2004) has emphasized the need for partnerships as a way of overcoming resource scarcity and the lack of appropriate capabilities in the contexts of deep poverty. However research on international strategic alliances highlights a substantial failure rate for such partnerships and a lack of knowledge about success factors for partner selection (Hitt et al., 2000). A useful framework for analyzing strategic alliances has been developed by Das & Teng (2001). In their view, alliance performance is dependent on mechanisms to lower uncertainty surrounding partner intentions and partner abilities, as well as on mechanisms to control partner behavior, thus limiting the probability of undesired outcomes. This highlights the need to find ways to build and maintain trust in partner goodwill and competence. The separate private benefits of partners and the differences in their competencies and organizational characteristics — including culture, norms, policies and processes — create the potential for conflict.

Here we will present two case studies that highlight how these challenges and hurdles can be overcome and how markets for new products and services can be created at the BOP. The cases involve two private sector companies (Telenor and Map Agro), whose overall strategic objective is to maximize economic returns from providing commercial products and services, and two existing local BOP business models (Grameen Bank and Waste Concern), whose strategic objectives include maximizing job creation and creating a clean environment. Telenor and Grameen Bank (Case 1) illustrate a model that combines an international and a local partner into a joint venture that is able to achieve several strategic objectives concomitantly. Waste Concern and Map Agro (Case 2) represent models, existing separately at the BOP, which forge an alliance that enables them to expand operations and to build new markets. In both cases, the partners collaborate around a core input into the local BOP model, either from the supply-side (Telenor) or by creating demand (Map Agro).